El Teniente's tailings offer dividends for Amerigo

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2013-02-21

Over the last forty years Klaus Zeitler has financed, built and managed base metal and gold mines in Europe, Africa, North and South America, and the Pacific.

His career started at German metals conglomerate Metallgesellschaft AG where he served as managing director, and officially ended with Teck (TCK.B-T, TCK-N), where as senior vice president his responsibilities included overseeing the exploration and development of mines in Peru, Mexico and the United States.

In between he founded Metall Mining—which in 1993 changed its name to Inmet Mining (IMN-T, IEMF-O) —before he was forced out by one of the company’s largest institutional shareholders, which disagreed with a decision by Zeitler and his management team to invest US$2.5 billion in the massive Antamina copper-zinc project in Peru.

“The pension fund and some of my directors felt that I had gone, well, sort of crazy,” Zeitler says in a telephone interview from Chile. “You must remember that at the time Inmet had a market cap of about US$1 billion...but what this shareholder didn’t understand was that it wasn’t a payment of US$2.5 billion, it was a commitment to invest US$2.5 billion.”

“I knew that Antamina would be one of the most outstanding mines in the world,” he continues, “and so I said: ‘Look, forget about it. If the board is not able to convince this shareholder that this is a good move, then I’m out of here.’ So I left and joined Teck.”

At his first meeting at Teck, Zeitler recalls, he asked then president and chief executive Norm Keevil, now Teck’s chairman, why Teck hadn’t participated in the public tender for Antamina. Says Zeitler: “He said: ‘Probably because my people were sleeping.’”

In 1998 Inmet sold Antamina to Teck, Rio Algom and Noranda for US$70 million in cash and a 3.33% net proceeds royalty. Today Teck holds a 22.5% stake in the mine, BHP Billiton (BHP-N) 33.75%; Xstrata (XSRAF-O, XTA-L) 33.75% and Mitsubishi Corporation 10%.

During his time at the Vancouver-based diversified miner one of Zeitler’s responsibilities was to see whether Chile’s state-owned copper giant Codelco would be interested in setting up a pilot plant using Teck’s CESL hydrometallurgical process, which Cominco had come up with and involved producing copper and nickel cathode from concentrates. (The closed-loop process produces no liquid effluents or sulphur dioxide with the only solids produced being gypsum and a leach residue that can be disposed of with associated mill tailings.)

In the end Teck was unable to sign a deal with Codelco to use the technology (a deal was struck with Vale (VALE-N) instead), but the meetings with Codelco brought Zeitler into close contact with some of the Chilean company’s top management, which would stand him in good stead years later.

In 2002 Zeitler retired from Teck, but that wasn’t to be the end of his career in the industry. A year later he learned that Minera Valle Central (MVC), a company set up by former members of Codelco and backed by a major Chilean private construction group, was for sale.

MVC was set up in 1990 to extract copper and molybdenum from tailings discharged from El Teniente, Codelco’s massive underground copper mine in the Andes. Between 1992 and 1996, MVC was turning a profit, Zeitler says. But all that changed in 1997 when the copper price fell to an average of 65¢ to 70¢ per lb.

MVC’s largest shareholder suddenly found himself in straightened circumstances because he owed money to the bank for a real-estate development and when the real-estate market soured around the same time, Zeitler says, the bank got nervous and called in the loan.

That’s when Zeitler stepped in. It was 2003 and Zeitler was convinced that the copper price had to go up eventually. “I didn’t know if it would rise within a month, or a year, or in two years, but I knew that it had to rise,” he recalls. “It wasn’t just a gut feeling. I had been in the business for forty years, and at that time, the copper price had been low for five years already, which in history happens only very, very rarely.”

“Copper is always up and down but in the past copper prices would be down for one or two years, and then they would go up again, and then come down again for one or two years,” he continues. “There were seldom periods where the copper price would stay down for five years, and so it was clear to me that it couldn’t last much longer.”

In the end Zeitler was right. A month after he bought MVC for a total of about US$23 million, the copper price started climbing again. Zeitler then injected the MVC assets into a junior exploration company with properties in Ontario called Amerigo Resources (ARG-T).

Last year Amerigo produced 51.7 million pounds of copper and 1.06 million pounds of molybdenum from El Teniente tailings at the company’s operations near Rancagua, Chile. About 50% of Amerigo’s production comes from fresh tailings that come out of the concentrator each day at the mine (about 130,000 to 140,000 tonnes a day), and the remaining 50% come from the 368-hectare Colihues tailings pond, about 1 km south of Amerigo’s plant.

“You can imagine how many tailings there are since they started production in 1904,” Zeitler comments. “They have been producing for over 100 years and they will be in production probably for another 50-100 years. It is in my view the largest-ever discovered copper ore body in the world if you consider past production plus future resources and reserves.”

Currently Amerigo is in talks with Codelco to extend its agreement to the company’s other tailings ponds, including the Cauquenes tailings deposit, which contains an estimated 500 million tonnes of higher-grade tailings and sits adjacent to Colihues. “Their board has already agreed to do the agreement, it’s just a matter of agreeing on the terms,” Zeitler says.

Amerigo pays royalties to Codelco based on the amount of copper it produces and at what price. Last year royalties added up to roughly US$43 million, Zeitler says.

In 2012 Codelco paid a dividend of 4¢ per share to shareholders of record—or about 6-7% of the company’s 70¢ share price on the Toronto Stock Exchange.

“It’s certainly one of the highest percentages for a dividend in the mining industry,” he claims. “That’s more than what you get from a bank.”

Zeitler says Amerigo started paying dividends soon after it was set up and only halted them for two years during the height of the financial crisis. The company has been cash flow positive every year since it started operations, he adds. In 2011 Amerigo posted net profit of $8.70 million on revenue of $166.07 million, down from a net profit of $13.10 million on revenue of $152.12 million in 2010.

Next year Zeitler believes copper production will total 45 to 50 million pounds along with 1 million pounds of molybdenum and anticipates lower cash costs due to contract changes with Amerigo’s power provider. The amended power contract, which kicked in on Jan. 1 2013, will contribute to net savings of about US$0.40 per lb. copper, Zeitler anticipates, which will improve the company’s cash flow.

Amerigo will release full-year financial results for 2012 on Feb. 27. For the three months ended September 30, 2012, however, the company posted a gross loss of $2.05 million, compared to a gross profit of $3.14 million in the third quarter of 2011. The company’s cost of sales were 19% higher in the third quarter year-on-year at $46.28 million.

Third-quarter results were adversely affected by a one-time charge for a $4.6 million bonus payment to the company’s Chilean workers on the signing of a new four-year union agreement and a $2.3 million deferred (future) income tax non-cash accounting charge following an increase in Chile’s corporate tax rate to 20%.

This year cash costs (the aggregate of smelting, refining and other charges, production costs net of molybdenum-related net benefits, administration and transportation costs) before the El Teniente royalty should come in at between US$1.95 per lb. and US$2.15 per lb. copper, he predicts.

“This year will be a pivotal year for the company, with significantly lower operating costs and replacement capital costs that we believe will reduce the company’s cash outlays by up to $35 million compared to 2012,” he says. “We are also proceeding with optimization studies, permitting and engineering, and financing discussions for the Cauquenes project, which will extend our operations in Chile by decades.”

At presstime in Toronto Amerigo was trading at 65¢ per share within a 52-week range of 51¢-95¢. The junior has about 172 million shares outstanding.

Raymond Goldie of Salman Partners has a target price on the stock of 80¢ per share.

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